Make sure to use income tax rates in effect in the year you are making the payment
Question: We are paying a retroactive pay increase to our employees as part of a new collective agreement. The pay raise actually applies to 2011. To calculate income tax source deductions, do I use the rates from 2011 or now? Alternatively, can I use the lump sum tax rates?
Answer: When paying a retroactive pay increase from a previous year, use the income tax rates in effect in the year you are making the payment.
To calculate income tax source deductions from a retroactive pay increase, you must first determine whether the employee’s total earnings for the year, including the retroactive pay increase, are more than $5,000.
To do this, add up all the employee’s earnings for the year and then subtract registered pension plan (RPP) contributions, retirement compensation arrangement contributions, registered retirement savings plan (RRSP) contributions (as long as there is reasonable grounds to believe the employee can make the contribution), union dues, amounts for living in a prescribed zone and amounts that have been authorized by a Canada Revenue Agency (CRA) tax services office.
If the result is no more than $5,000, deduct 15 per cent federal income tax from the payment (10 per cent for employees in Quebec). If the amount is more than $5,000, use the bonus method to determine income tax deductions.
Please note that in some cases, individuals may use a special tax calculation when filing their personal income tax return for certain types of retroactive lump-sum payments.
These types of payments do not include amounts from a normal collective bargaining process, with the exception of arbitration awards
For Quebec provincial income tax, if the employee’s total earnings for the year, plus the retroactive pay increase, are no more than $14,000, deduct eight per cent income tax from the payment. If the total earnings exceed $14,000, use the bonus method to calculate income tax deductions.
Retroactive pay increases are also subject to Canadian Pension Plan/Quebec Pension Plan (C/QPP) contributions. If you are paying the retroactive pay increase with the employee’s regular pay, deduct C/QPP contributions in the usual way. If you are paying the retroactive pay increase separately from regular pay, use the current fixed contribution percentage rate to calculate C/QPP contributions, provided the employee has not reached the maximum C/QPP contribution for the year.
Retroactive pay increases are also subject to employment insurance (EI) and Québec Parental Insurance Plan (QPIP)premiums, as long as the employee has not reached the annual maximums for insurable earnings. Calculate the EI and QPIP premiums by multiplying the retroactive pay increase by the fixed premium percentage rates.
Characteristics of a remote work site
Question: We are sending an employee to work at a remote work location. We will be providing board and lodging. Is there a certain form the employee must complete for the CRA or Revenu Quebec (RQ) to have the board and lodging benefit exempt from source deductions or can we just exclude it from the employee’s income?
Answer: There is no form the employee must fill out to exclude the board and lodging benefit from source deductions. You may be thinking of the federal TD4, Declaration of Exemption—Employment at Special Work Site. This form is only used for special work sites, not remote work sites.
To qualify as a remote work site, the following conditions must apply:
• The work site must be located at least 80 kilometres from the closest established community that has at least 1,000 residents. (For a community to be considered “established” essential services must be available in the community or within a reasonable driving distance. The CRA considers essential services to be things such as a food store, clothing store with clothes in stock, accommodations, certain medical services and certain educational facilities. It would not be reasonable to expect the employee to set up and maintain a home at the remote work location because it is remote and far from an established community.)
• The employer has not provided the employee a “self-contained establishment.”
• The board and lodging must cover a period of absence of at least 36 hours, during which the employee’s duties require him to be away from his principal place of residence or to be at the remote work location.
When considering whether a place is remote, RQ also examines factors such as the type of transportation available and the time needed to travel.
If the remote work site meets all of these conditions, you do not have to include the board and lodging benefit in the employee’s earnings for calculating C/QPP contributions, EI and QPIP premiums and income tax deductions.
Taxability of stress management courses
Question: We are paying for our employees to attend stress management workshops at work to help them better cope with their job demands. Is this a taxable benefit for the employees?
Answer: No. The CRA and RQ consider this type of workshop to be business-related. As a result, no taxable benefit arises.
Annie Chong is the manager of the payroll consulting group at Carswell, a Thomson Reuters business. She can be reached at [email protected] or (416) 298-5085
